Keep an Eye on France

11/22/2011 6:30 am EST


Jim Jubak

Founder and Editor,

MoneyShow’s Jim Jubak is closely watching the credit rating of France, because if it loses its AAA credit rating, the ECB will have to pick up the slack, which may have serious implications.

For the week ahead, watch France. France and what happens to it in the next couple of weeks is really the key whether the Euro debt crisis turns from a crisis into a catastrophe that takes down, well, who knows how much of the global financial system.

So why do I say watch France? That’s because this thing that was put in place, the European Financial Stability Facility, to try to fund the Greek prices, put a firewall around Italy, and support sovereign debt here and there, it has not yet really gotten into full operation.

People talk about it as being a pot of money to do this. Well, it’s not really a pot of money. It’s a pot of guarantees. The idea was that the governments of the Eurozone would guarantee to back these things, and basically the facility would borrow the credit rating of these governments and be able to issue bonds and sell them.

So, backed by Germany, which has a got a AAA rating—and Finland and the Netherlands and France, which also have AAAs—the facility has a AAA rating, which means that it can raise money relatively easily and relatively cheaply. At least that was the theory.

The problem is, of course, that if some of those governments lose their AAA rating, so does the facility itself, and that means it gets to be either just more expensive to raise money or maybe not even possible at all.

If France loses its AAA rating—which it well could, as S&P has put it on credit watch and said the government is really overextended—if it loses its AAA rating, it pretty much means that since France is such a big part of the guarantees, it means that this facility will lose its AAA rating. In the current market, that’s enough to really make it doubtful that they’re going to be able to raise money at a decent enough rate to make a difference.

So really what you’re looking at is a series of dominoes, and I don’t know how to say domino in French, where if the French credit rating goes, all these other bad things happen.

Really, the European Central Bank is counting on the facility to pick up the burden, so it doesn’t have to become the buyer of last resort. If that facility doesn’t exist or can’t raise as much money as it was supposed to raise, it means it all falls back on the European Central Bank, and that would make everybody really, really uncomfortable. That’s why France is the thing to watch.

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